Chapter 7 Bankruptcy Basics
There are multiple Chapters of the U.S Bankruptcy Code under which a debtor may file. The most advantageous of those is Chapter 7, which provides for a “fresh start” and can potentially wipe out all the debtor’s unsecured debt without the debtor having to pay any additional money to his or her creditors.
The Means Test
In order to qualify for a Chapter 7 Bankruptcy, the debtor needs to pass the means test. If the debtor’s current monthly income is less than the state median, then the debtor may file the bankruptcy petition without application of the means test. If the debtor’s income is over the state median the means test must be applied and there will be a presumption of abuse if the debtor’s income is over certain limits. A debtor can only rebut the presumption of abuse by showing that there are special circumstances which justify the allowance of an additional reduction from their monthly income for extraordinary expenses. If the debtor cannot rebut the presumption of abuse then the case will be dismissed or if the debtor consents, the case will be converted to a Chapter 13 Bankruptcy which requires a repayment of the debts.
A Chapter 7 Bankruptcy begins by the debtor filing a petition with the bankruptcy court. In addition to the petition, the debtor must file schedules of assets and debts, schedules of current income and current expenses, a statement of financial affairs, and a schedule of executory contracts and unexpired leases. If the debtor has retained an attorney to represent them in the bankruptcy case then the debtor’s attorney would handle completing these documents. Once the case is filed the creditors will receive notice of the case and that the “automatic stay” is in effect and all collection action must stop. An impartial case trustee will be appointed to administer the case and liquidate the debtor’s non-exempt assets. The debtor will then need to attend a “meeting of creditors” or 341 Meeting at the bankruptcy court where the trustee will ask the debtor certain questions to determine if there are any assets that could be liquidated. Most Chapter 7 cases are no-asset cases. If the case is a no asset case then the debtor will receive a discharge and all unsecured dischargeable debt will be wiped out. Certain debts are not dischargeable in Chapter 7 such as income taxes incurred within the last three years, child support payments and alimony payments. Student loans are only dischargeable in extremely limited cases.
In Connecticut a debtor can choose to either use the State or Federal property exemptions. All exempt property is safe from the creditors and can be retained by the debtor after the bankruptcy. The State exemptions are more advantageous for debtors with substantial equity in their primary residence while the Federal exemptions are more advantageous for debtors with other types of assets. Most Chapter 7 bankruptcy cases end with the debtor able to keep all their property at the conclusion of the case.